Artemis Alpha Regulatory News (ATS)

ARTEMIS ALPHA TRUST PLC (the "Company")

LEI: 549300MQXY2QXEIL3756

Half-Yearly Financial Report for the six months ended 31 October 2020

This announcement contains regulated information

Chairman's Statement

Performance

In the six months to 31 October 2020 your Company's net asset value per share and share price rose by 15.0% and 8.8% respectively on a total return basis, ending the period at 352.66p (NAV per share) and 268.00p (share price). The FTSE All-Share Index fell by 2.0% over the same period.

Since 31 October 2020, the portfolio has continued to perform strongly. At 9 December 2020 the NAV per share was 430.44p and the share price was 384p, representing a discount of 10.8%.

While some of our investee companies (such as food delivery) have benefited from the trends resulting from, or accentuated by, the pandemic, others (such as airlines) have recently recovered to some extent following the news on COVID vaccines.

More detailed information on the performance of our portfolio is set out in the Investment Manager's Review which follows.

Earnings & dividends

Revenue earnings per share for the six months to 31 October 2020 were 1.59p, a decrease of 42.0% on the comparative period last year, caused primarily by a fall in investment income. The Board has today declared a first interim dividend of 2.11p per ordinary share (2019: 2.10p) which will be paid on 21 January 2021 to shareholders on the register as at 29 December 2020. The Company is on track to deliver on its policy of increasing the dividend each financial year by more than the increase in the level of the Consumer Prices Index.

Discount and share buy backs

Although the discount to NAV had widened to 23.9% at 31 October 2020, it has narrowed substantially since then. The Company bought back 167,000 shares at a total cost of £0.5 million and an average discount of 17.2% during the half-year. A further 320,000 shares were bought back following the period end.

The Company will continue to consider buying back shares when appropriate and, in particular, when this is necessary to address imbalances between supply and demand.

Gearing

During the period, the Company increased its use of contracts for difference to achieve gearing, which stood at 9.9% at the period end. This has proved to be more cost-efficient than a more conventional bank loan.

Outlook

While it is pleasing to report the recent improvement in performance, the markets are still sensitive to COVID updates and, as we approach the end of the calendar year, Brexit too is back in the forefront of people's minds, raising the prospect of further volatility. The Investment Manager continues to identify opportunities arising from this extraordinary period of dislocation.

Duncan Budge

Chairman

9 December 2020

Investment Manager's Review

Overview 

Over the period, the Company's NAV increased by 15.0% compared to a decline of 2.0% in the FTSE All-Share Index. Performance was driven primarily by stock-specific factors rather than geographic, style or sector positioning. In broad terms, positive absolute and relative share price performance came from two distinct categories: companies seeing an improvement in revenue and/or profitability from behavioural changes during the pandemic (Delivery Hero, Nintendo, Hornby); and companies that are emerging from lockdowns in better shape than expected (Dignity, Frasers and Ryanair).

Since April 2018, we have implemented a revised strategy with a concentrated approach to value investing. In our view, value investing is just a framework, which focuses on valuing a company independently of the market price, and then investing based on the attractiveness of market prices relative to your judgement of value. How you interpret and apply that framework requires subjective judgement and depends on what you think drives the value of a business.

From this approach, drawdowns in equity markets are useful in the long-term opportunities they offer, despite creating ugly results in the short-term. In the second half of 2018, equity markets sold off, driven by growth companies. This allowed us to establish positions in Facebook and Just Eat; and to increase our weightings in Nintendo and Plus500. These holdings have been amongst our most valuable contributors in recent months.

In the market's fall of early 2020, we have perceived the value opportunity to be in sectors that have been damaged temporarily by stay-at-home restrictions to stop the spread of the pandemic. Our first actions were to invest in sectors directly in the eye of the storm - such as banks and airlines. We increased our gearing from zero before the crisis to approximately 10%. In this period, we have found further opportunity in sectors where we think lockdowns largely defer, rather than destroy, demand; and where demographics underpin consumption, such as optical-lenses and house-building. We have taken actions to leave us well placed to emerge from the crisis with a more valuable portfolio than we had before.

If digitalisation was not at the top of every boardroom's agenda, the impact of the pandemic has made sure it is now. We continue to think that digitalisation will be more of a hindrance than a help for many businesses, with challenges to revenue growth and pricing-power. We are invested in a number of sectors that stand to benefit directly from these trends, which we view as unlikely to change even once the world returns to a more normal environment. In these sectors, we judge valuations to be attractive when accounting for the duration of earnings growth and potential improvement in business economics.

The flipside of this is that we continue to think there are selected opportunities in sectors such as airlines and retail, where cyclical challenges are perceived to be structural, and where there is a strong case that market leaders will emerge in a less competitive environment than before.

We are primarily bottom-up, fundamental stock-pickers. That said, the portfolio is constructed with top-down considerations and sector correlations in mind with the objective of being able to fare well in a variety of market scenarios. This also explains the current bifurcation in our positioning between businesses currently facing challenges and those with evidently bright structural prospects for growth.

Portfolio

Key sectoral exposures

Video games and hobbies (13.8% of NAV) is our largest sectoral investment. Hornby responded well to its H1 results in which the company grew sales by 33% and was profitable as gross margins increased from 41% to 47%. The company is benefiting from lockdown tailwinds and progress made on reinvigorating its product development in recent years. We remain excited about the company's opportunity to embrace digitalisation as direct-to-consumer sales only account for less than 15% of revenue - but gross margins are substantially higher than the group average.

The premise for increasing our investment in Nintendo is similar to our rationale for holding Hornby, despite the vast differences in scale ($70bn market capitalisation vs. £100m); the value of content can be increased through using digital routes to market. In Nintendo's Q1 2020 results, an increase in digital software penetration from 38% to 56% led to gross margins increasing from 49% to 59%. Peer gaming companies have digital penetration above 70%; and we believe Nintendo will see a substantial improvement in profitability as its customers make the same journey. We made a modest addition to our holding in Prosus, that we purchased earlier in the calendar year. The company's discount to assets widened, despite strong underlying performance.

Food delivery (13.0%) companies Delivery Hero and Just Eat continue to be amongst our top holdings. Delivery Hero's share price has risen as it has demonstrated high organic growth rates (c.90%) across its geographies. The company seems to be building successfully a "local services" platform through its expansion into 'quick-commerce', such as grocery services. The success of Meituan Dianping, the dominant platform in China, is an indicator of the potential prize. Meituan currently carries a market cap of $230bn. This is for a new industry and a company only founded in 2010. For context, AstraZeneca is currently the largest constituent of the FTSE and has a market cap of $140bn.

In our view, Just Eat's share price has not recognised the permanent benefit that the pandemic has brought to the business due to the acceleration of user adoption. This is partly as the company surprised investors by announcing in June the acquisition of US food delivery company Grubhub. The deal creates a wider range of possible outcomes, though we feel that few positive scenarios are being discounted. By acquiring Grubhub, Just Eat is effectively doubling its addressable market by issuing only 30% of its equity. CEO Jitse Groen has a strong record in leveraging profitable market positions to expand aggressively in markets where its competitors have weaker foundations. Groen owns 10% of the company and so we feel he is incentivised to make decisions for the benefit of shareholders. We have used periods of share price weakness to increase our holding.

Our retail (10.2%) holdings in Frasers Group and Dixons Carphone performed well during the period. The crisis has asymmetrically impacted weaker players who are unlikely to emerge as effective competition. Frasers is continuing to build leading platforms in luxury and sportswear retail, which we think are two fundamentally attractive sub-segments of retail. The pandemic has provided it with the opportunity to acquire DW Sports and build a stake in Mulberry. The company's full year results in August demonstrated its resilience as it grew earnings, despite seeing the impact of lockdown for two months of the year. Dixons' core performance has been strong as it has successfully retained sales that shifted online and grown its share. In September, the group confirmed that revenues for the first three months of its financial year were up 12% in UK electricals and 16% in international electricals, with online growing at over 120% and now accounting for 42% of group sales.

UK housebuilding (9.9%) is the sector in which we were most active during the period. We have increased our holding in Redrow, built a new position in Bellway and maintained our position in Springfield. We view housebuilding as an attractive recovery sector as demand is inelastic and dictated by demographics. A deficit in supply exists due to a decade of under-building. The market seems to have forgotten that in 2009, despite a historic contraction in mortgage supply and rise in unemployment, UK house prices did not fall. In addition to these existing structural tailwinds, the sector is currently benefitting from behavioural changes from the virus as consumers place a higher weighting on quality of life and therefore on the value of housing. These trends have been demonstrated by record order books. Despite a range of positive indicators, housebuilders' valuations have been depressed, creating in our view an opportunity for strong future returns.

In past reports we outlined the rationale for holding easyJet and Ryanair (9.9%), despite the airline sector facing significant short term headwinds. Over the summer months, even with unpredictable government restrictions, European airlines achieved high load factors, which in our view demonstrates the continued desire to travel and likely growing pent-up demand. easyJet's share price has significantly underperformed other low cost carriers Wizz Air and Ryanair. In our view, the company's cost base and balance sheet flexibility are misunderstood. We increased our holding substantially at prices that we believe represent buying Airbus planes at a discount, with a franchise that is the second largest airline in Europe in for free.

Banks (8.7%) tend not to fare well in recessions and face headwinds from a low interest rate environment. However, if it is widely accepted that the crisis has accelerated digitalisation, then in our view the potential benefits of lower costs for banks, for example by closing branches, seem to be overlooked. In recent months, we think it has also been increasingly clear that banks will suffer a lower impairment cycle than is typical in a recession of this severity. That will come from a combination of low interest rates, government loans and employment support. We made additions to our holding in Lloyd's and remain optimistic about the sector's potential return, given current low valuations and high capital ratios.

Dignity (8.0%) was our single largest contributor and is currently our top position. The company's share price responded positively to the conclusion of the Competition Markets Authority's (CMA) review of the sector. The primary outcome is the implementation of "sunlighting" to increase transparency of prices and services offered by funeral and crematoria operators. The secondary outcome is greater monitoring of back-of-house services provided by operators. Due to the exceptional circumstances of COVID, the CMA stopped short of implementing any price caps, although this option remains on the table. We continue to believe that Dignity is well-positioned to succeed and deliver value for all stakeholders in an environment of greater transparency and regulation. We think its unique market position, as an owner of a national network of crematoria and funeral homes with a substantial pre-need business, provides a solid foundation to create significant value over the long term.

Plus500 (6.3%), the financial trading platform, has benefited from elevated volatility. In H1 2020, the company acquired 198,000 customers, and grew profits nearly four-fold. The business has a strong balance sheet (over $600m in net cash) with which to invest in future growth.

We established a new position in EssilorLuxottica (3.4%) in recent months, our largest single investment in the period. The company is the global market leader in optical lens and frames, following the merger of Essilor and Luxottica in 2018. The combined business is the only vertically integrated participant in the eyewear market with unrivalled scale: its R&D expense is larger than the rest of the industry combined. The market for eyewear is attractive due to the duration and consistency of growth. Myopia is increasing due to screen usage. Presbyopia is a function of aging demographic. Similar to the funeral industry, we will all be customers one day. Overall, the eyewear industry should be growing at c.4% per annum and predictably for several decades.

Dysfunctional corporate governance has meant that the two businesses took longer to integrate than first expected. In time, the delivery of synergies should result in higher revenue growth and improved margins. The company's share price declined as it was adversely affected by lockdowns; but we expect demand to recover reasonably quickly as prescription lenses account for c.80% of the business.

Fevertree (2.5%), a holding purchased earlier in the calendar year, has performed well as it has a stronger off-trade (e.g. grocery) presence than its peers; and its strategy in the US has started to gain traction with growth accelerating in spite of COVID headwinds.

IWG (4.5%), the serviced office provider, has been more resilient in the downturn than many expected. The company stands to benefit from the likely increase in demand arising from the pandemic for decentralised flexible workspace solutions. The business has over 3,000 centres, of which the majority are located outside city-centres, in contrast to its competitors who are focused on urban locations. The fundraising completed earlier in the year means that the company has net cash on its balance sheet (ex-leases), meaning it is well positioned to be a consolidator in the sector. We continue to believe that the pursuit of a capital-light franchising strategy has the potential to deliver significant returns to shareholders.

Reaction Engines (3.7% - unlisted), the aerospace technology company, announced an investment from Rolls-Royce and Baillie Gifford at a price higher than our current valuation. We have made no changes to our valuation given certain criteria used to evaluate materiality; but note the positive development, which should accelerate commercialisation of the company's technology.

We are attracted to GlaxoSmithKline (3.6%) primarily due to the quality of its vaccines and consumer healthcare divisions, which collectively account for the majority of earnings. Consumer staple peers have re-rated substantially and we expect GSK to benefit from a re-rating as the planned spin-off of this division in 2022 draws nearer. The vaccines industry should see a structural boost from COVID and GSK is the largest vaccine-maker globally. Whilst the market value of vaccine-makers has increased by over $100bn year to date, GSK's market value declined by $27bn (22%). We used share price weakness to add to our holding.

Capital & Counties (CapCo) (2.8%) was our largest single detractor, declining by 37%. The recovery of activity in city centres from lockdown has been weak and international travel (accounting for c.40% of Covent Garden's traffic) remains restricted. In May, the company used its unlevered balance sheet following the disposal of Earl's Court in 2019 to acquire 27% of its peer, Shaftesbury. We like this acquisition as it was opportunistic. Shaftesbury is a unique asset, and there are potential synergies from a merger, as the two estates are adjoining in parts. At the current share price of 105p, the Covent Garden assets are valued at less than £1,000 per square foot. Even in negative scenarios where we assume significant rent reductions, we see limited downside - and so we added to our position. In a more likely scenario, we think traffic will recover given the enduring attraction of the area, which should provide value for tenants in a world where consumers increasingly demand experiential retail.

Our turnover in the period was elevated as we sold holdings in Rocket Internet, Polar Capital and Tesco. We disposed of Rocket Internet as the company announced a de-listing offer. We approximately broke-even on our investment, but benefited from the insights it provided us on the food delivery sector in particular. Polar Capital, the last of our legacy investments in asset managers, was sold following a period of strong performance. We disposed of our position in Tesco as we noted the actions of several food platforms globally expanding more directly into space currently occupied by supermarkets. Tesco's management have executed well to regain competitiveness in its core offering and we continue to admire the company. However, the uncertainty introduced by the potential shift of convenience grocery online prompted us recycle capital into areas where we have higher confidence.

Our portfolio is increasingly concentrated as the process of rationalisation outlined in our 2018 strategic review has continued. The number of holdings has fallen further from 39 to 32 and our top 15 holdings account for 80% of the Company's NAV. Our gearing currently stands at 10.0%. A more narrow focus has been important in allowing us to better understand and monitor the short-term impact and long-term implications of the changing environment.

Outlook

Our outlook is broadly unchanged: we think the combination of Brexit and now COVID has created a significant value opportunity in exposed UK equities. In our judgement, the prospects for returns are high. In our last report, we commented on how perspective is the "first casualty in a crisis". At the time of writing, the potential of a successful vaccine has allowed the market to regain some perspective, which has benefited our positioning. We continue to focus primarily on risks and opportunities within our existing portfolio, and our attention is turning towards areas that will fail to keep up with improving fundamentals or that will become unpopular due to the change in market sentiment. Above all, we remain committed to opportunism.

John Dodd, Kartik Kumar

Fund Managers

Artemis Fund Managers Limited

9 December 2020

Top 15 holdings

Condensed income statement  

The total column of this statement represents the Statement of Comprehensive Income of the Company, prepared in accordance with International Financial Reporting Standards. The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies.

All items in the above statement derive from continuing operations.

All income is attributable to the equity shareholders of Artemis Alpha Trust plc. There are no minority interests.

Condensed statement of financial position

Condensed statement of changes in equity

Condensed statement of cash flows

Notes to the half-yearly financial report

1. Accounting policies

The Half-Yearly Financial Report has been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', the provisions of the Companies Act 2006 and with the guidance set out in the Statement of Recommended Practice for Investment Trust Companies and Venture Capital Trusts ("SORP") issued by the Association of Investment Companies in October 2019.

The accounting policies remain the same as disclosed in the Annual Financial Statements for the year ended 30 April 2020.

2. Earnings/(loss) per ordinary share

3. Net asset value per ordinary share

During the period, there were no shares repurchased or cancelled from treasury (six months ended 31 October 2019: repurchased 1,233,500 shares into treasury and immediately cancelled 462,500 shares from treasury and year ended 30 April 2020: repurchased and cancelled 771,000 shares from treasury).

4. Dividends

A first interim dividend for the year ending 30 April 2021 of 2.11p per ordinary share has been declared. This will be paid on 21 January 2021 to those shareholders on the register at close of business on 29 December 2020.

5. Analysis of retained earnings - capital

6. Reconciliation of liabilities arising from financial activities

7. Comparative information

The financial information for the six months ended 31 October 2020 and 31 October 2019 has not been audited and does not constitute statutory financial statements as defined in Section 234 of the Companies Act 2006.

The information for the year ended 30 April 2020 has been extracted from the Audited Financial Statements for the year ended 30 April 2020. These financial statements contained an unqualified auditor's report and have been lodged with the Registrar of Companies and did not contain a statement required under Section 498 of the Companies Act 2006.

8. Related party transactions

The amounts paid to the Investment Manager are disclosed in the Condensed income statement. However, the existence of an independent Board of Directors demonstrates that the Company is free to pursue its own financial and operating policies and therefore, under IAS 24: Related Party Disclosures, the Investment Manager is not considered to be a related party.

9. Fair value hierarchy

IFRS 7 'Financial Instruments: Disclosures' requires an entity to provide an analysis of investments held at fair value through profit and loss using a fair value hierarchy that reflects the significance of the inputs used in making the measurements of fair value. The hierarchy used to analyse the fair values of financial assets is set out below.

Level 1 - instruments with quoted prices in an active market;

Level 2 - instruments whose fair value is based directly on observable current market prices or is indirectly derived from market prices; and

Level 3 - instruments whose fair value is determined using a valuation technique based on assumptions that are not supported by observable current market prices or are not based on observable market data.

The instruments held at the balance sheet date fell into the categories, Level 1, Level 2 and Level 3. The values in these categories are summarised as part of this note. Any investments that are delisted or suspended from a listed stock exchange are transferred from Level 1 to Level 3.

The valuation of the Level 3 investments would not be significantly different had reasonably possible alternative valuation bases been applied.

Statement of Principal Risks and Uncertainties

Pursuant to DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, the principal risks faced by the Company include general market risk, regulatory, operational and financial risks. These risks, which have not materially changed since the Annual Financial Report for the year ended 30 April 2020, and the way in which they are managed, are described in more detail in the Annual Financial Report which is available at artemisalphatrust.co.uk.

Responsibility Statement of the Directors in respect of the Half-Yearly Financial Report

The Directors confirm that to the best of their knowledge, in respect of the Half-Yearly Financial Report for the six months ended 31 October 2020:

· the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' issued by the International Accounting Standards Board as adopted by the EU;

· having considered the expected cash flows and operational costs of the Company for the 18 months from the period end, the Directors are satisfied that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason, the going concern basis of accounting continues to be used in the preparation of the Half-Yearly Financial Report;

· the interim management report includes a fair review of the information required by:

(a) Disclosure Guidance and Transparency Rule 4.2.7R (indication of important events during the first six months; and a description of the principal risks and uncertainties for the remaining six months of the year); and

(b) Disclosure Guidance and Transparency Rule 4.2.8R (related party transactions).

The Half-Yearly Financial Report for the six months ended 31 October 2020 was approved by the Board and the above responsibility statement was signed on its behalf by:

Duncan Budge

Chairman

9 December 2020

Copies of the Half-Yearly Financial Report for the six months ended 31 October 2020 will be sent to shareholders shortly and will be available from the registered office at Cassini House, 57 St James's Street, London SW1A 1LD as well as on the website, artemisalphatrust.co.uk.

Artemis Fund Managers Limited

Company Secretary

For further information, please contact:

Artemis Fund Managers Limited

Telephone: 0131 225 7300

10 December 2020